J.G. WENTWORTH CO FORM 10-Q. (Quarterly Report) Filed 05/10/16 for the Period Ending 03/31/16

Transcription

1 J.G. WENTWORTH CO FORM 10-Q (Quarterly Report) Filed 05/10/16 for the Period Ending 03/31/16 Address 201 KING OF PRUSSIA ROAD SUITE 501 RADNOR, PA Telephone (484) CIK Symbol JGWE SIC Code Finance Services Industry Investment Services Sector Financial Fiscal Year 12/31 Copyright 2016, EDGAR Online, Inc. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use.

2 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C FORM 10-Q (Mark One) ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 o 1934 For the quarterly period ended March 31, 2016 Or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF For the transition period from to Commission File Number: THE J.G. WENTWORTH COMPANY (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 201 King of Prussia Road, Suite 501 Radnor, Pennsylvania (Address of principal executive offices) (Zip Code) (484) (Registrant s telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý Yes o No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ( of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ý Yes o No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. Large accelerated filer o Accelerated filer x Non-accelerated filer o Smaller reporting company o Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). o Yes ý No The number of shares of the registrant s Class A common stock, par value $ per share, outstanding was 15,728,041 as of April 30, The number of shares of the registrant s Class B common stock, par value $ per share, outstanding was 8,715,024 as of April 30, 2016.

3 TABLE OF CONTENTS PART I FINANCIAL INFORMATION Item 1. Financial Statements 1 Condensed Consolidated Balance Sheets as of March 31, 2016 (Unaudited) and December 31, Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2016 and 2015 (Unaudited) 2 Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2016 and 2015 (Unaudited) 3 Condensed Consolidated Statement of Changes in Stockholders Equity for the Three Months Ended March 31, 2016 (Unaudited) 4 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015 (Unaudited) 5 Notes to the Condensed Consolidated Financial Statements (Unaudited) 7 Item 2. Management s Discussion and Analysis of Financial Condition and Results of Operations 41 Item 3. Quantitative and Qualitative Disclosures About Market Risk 55 Item 4. Controls and Procedures 57 PART II OTHER INFORMATION Item 1. Legal Proceedings 58 Item 1A. Risk Factors 58 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 58 Item 3. Defaults Upon Senior Securities 58 Item 4. Mine Safety Disclosures 58 Item 5. Other Information 58 Item 6. Exhibits 59

4 CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements which reflect management s expectations regarding our future growth, results of operations, operational and financial performance and business prospects and opportunities. These forward looking statements are within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended ( the Exchange Act ), and the Private Securities Litigation Reform Act of All statements, other than statements of historical fact, are forward-looking statements. You can identify such statements because they contain words such as plans, expects or does expect, budget, forecasts, anticipates or does not anticipate, believes, intends, and similar expressions or statements that certain actions, events or results may, could, would, might, or will, be taken, occur or be achieved. Although the forward-looking statements contained in this Quarterly Report on Form 10-Q reflect management s current beliefs based upon information currently available to management and upon assumptions which management believes to be reasonable, actual results may differ materially from those stated in or implied by these forward-looking statements. Forward-looking statements necessarily involve significant known and unknown risks, assumptions and uncertainties that may cause our actual results, performance and achievements in future periods to differ materially from those expressed or implied by such forward-looking statements. Although we have attempted to identify important risk factors that could cause actual actions, events or results to differ materially from those described in or implied by our forwardlooking statements, a number of factors could cause actual results, performance or achievements to differ materially from the results expressed or implied in the forward-looking statements. We cannot assure you that forward-looking statements will prove to be accurate, as actual actions, results and future events could differ materially from those anticipated or implied by such statements. These forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q, and, except for our ongoing obligations to disclose material information under the federal securities laws, we undertake no obligation to publicly revise any forward-looking statements to reflect circumstances or events after the date of this Quarterly Report on Form 10-Q, or to reflect the occurrence of unanticipated events. These factors should be considered carefully and readers should not place undue reliance on forward-looking statements. You should, however, review the factors and risks we describe in the reports we file from time to time with the Securities and Exchange Commission after the date of this Quarterly Report on Form 10-Q. As set forth more fully under Part 2, Item 1A. Risk Factors in this Quarterly Report on Form 10-Q, these risks and uncertainties include, among other things: our ability to execute on our business strategy; our ability to successfully compete in the industries in which we operate; our dependence on the effectiveness of direct response marketing; our ability to retain and attract qualified senior management; any improper use of or failure to protect the personally identifiable information of past, current and prospective customers to which we have access; our ability to upgrade and integrate our operational and financial information systems, maintain uninterrupted access to such systems and adapt to technological changes in the industries in which we operate; our dependence on third parties, including our ability to maintain relationships with such third parties and our potential exposure to liability for the actions of such third parties; damage to our reputation and increased regulation of our industries which could result from unfavorable press reports about our business model; the accuracy of the estimates and assumptions of our financial models; infringement of our trademarks or service marks; our ability to maintain our state licenses or obtain new licenses in new markets; changes in, and our ability to comply with, federal, state and local laws and regulations governing us; our business model being susceptible to litigation; our ability to continue to purchase structured settlement payments and other financial assets; the public disclosure of the identities of structured settlement holders maintained in our proprietary database; our dependence on the opinions of certain credit rating agencies of the credit quality of our securitizations; our ability to complete future securitizations, other financings or sales on favorable terms; the insolvency of a material number of structured settlement issuers; adverse changes in the residential mortgage lending and real estate markets, including any increases in defaults or delinquencies, especially in geographic areas where our loans are concentrated; our ability to grow our loan origination volume, acquire mortgage servicing rights, or MSRs, and recapture loans that are refinanced; changes in the guidelines of government-sponsored entities, or GSEs, or any discontinuation of, or significant reduction in, the operation of GSEs;

5 potential misrepresentations by borrowers, counterparties and other third-parties; changes in prevailing interest rates and our ability to mitigate interest rate risk through hedging strategies; our ability to obtain sufficient working capital at attractive rates or obtain sufficient capital to meet the financing requirements of our business; our ability to remain in compliance with the terms of our substantial indebtedness; and our ability to meet the continued listing requirements of the New York Stock Exchange.

6 Condensed Consolidated Balance Sheets PART I. FINANCIAL INFORMATION Item 1. Financial Statements ASSETS March 31, 2016 December 31, 2015 (Unaudited) (Dollars in thousands, except share data) Cash and cash equivalents $ 26,465 $ 57,322 Restricted cash and investments 131, ,780 VIE finance receivables, at fair value (1) 4,439,811 4,376,458 Other finance receivables, at fair value 23,263 9,689 VIE finance receivables, net of allowances for losses of $8,759 and $8,659, respectively (1) 95,534 99,874 Other finance receivables, net of allowances for losses of $1,551 and $1,707, respectively 9,450 10,468 Other receivables, net of allowances for losses of $273 and $273, respectively 16,755 16,285 Mortgage loans held for sale, at fair value (2) 187, ,508 Mortgage servicing rights, at fair value (2) 30,164 29,287 Premises and equipment, net of accumulated depreciation of $9,219 and $7,961, respectively 5,262 5,674 Intangible assets, net of accumulated amortization of $21,330 and $20,700, respectively 29,799 30,429 Goodwill 8,369 8,369 Marketable securities 79,414 84,994 Deferred tax assets, net 2,250 Other assets 78,162 82,577 Total Assets $ 5,161,128 $ 5,074,964 LIABILITIES AND STOCKHOLDERS EQUITY Accrued expenses and accounts payable $ 22,902 $ 21,548 Accrued interest 23,944 22,380 Term loan payable 440, ,181 VIE derivative liabilities, at fair value 72,363 66,519 VIE borrowings under revolving credit facilities and other similar borrowings 38,191 48,828 Other borrowings under revolving credit facilities and other similar borrowings 181, ,243 VIE long-term debt 198, ,363 VIE long-term debt issued by securitization and permanent financing trusts, at fair value 4,016,993 3,928,818 Other liabilities 55,380 65,106 Deferred tax liabilities, net 9,936 18,825 Installment obligations payable 79,414 84,994 Total Liabilities $ 5,139,712 $ 5,018,805 Commitments and contingencies (Note 19) Class A common stock, par value $ per share; 500,000,000 shares authorized, 16,270,113 issued and 15,728,041 outstanding as of March 31, 2016, 16,076,444 issued and 15,534,372 outstanding as of December 31, $ $ Class B common stock, par value $ per share; 500,000,000 shares authorized, 8,715,029 issued and outstanding as of March 31, 2016, 8,908,698 issued and outstanding as of December 31, 2015, respectively. Class C common stock, par value $ per share; 500,000,000 shares authorized, 0 issued and outstanding as of March 31, 2016 and December 31, 2015, respectively. Additional paid-in-capital 105, ,713 Accumulated deficit (86,852) (70,765) 18,348 33,948 Less: treasury stock at cost, 542,072 shares as of March 31, 2016 and December 31, 2015, respectively. (2,138) (2,138) Total stockholders equity, 16,210 31,810 Non-controlling interests 5,206 24,349 Total Stockholders Equity 21,416 56,159

7 Total Liabilities and Stockholders Equity $ 5,161,128 $ 5,074,964 (1) Pledged as collateral to VIE borrowings under revolving credit facilities and other similar borrowings. Refer to Note 6 VIE and Other Finance Receivables, at Fair Value and Note 7 VIE and Other Finance Receivables, net of Allowance for Losses. (2) Pledged as collateral to Other borrowings under revolving credit facilities and other similar borrowings. Refer to Note 8 Mortgage Loans Held for Sale, at Fair Value and Note 9 Mortgage Servicing Rights, at Fair Value. The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 1

8 Condensed Consolidated Statements of Operations (Unaudited) REVENUES Three Months Ended March 31, (Dollars in thousands, except per share data) Interest income $ 53,659 $ 44,392 Realized and unrealized (losses) gains on VIE and other finance receivables, long-term debt and derivatives (9,857) 39,739 Realized and unrealized gains on sale of mortgage loans held for sale, net of direct costs 16,656 Changes in mortgage servicing rights, net 877 Servicing, broker, and other fees 3, Loan origination fees 1,636 Realized and unrealized gains on marketable securities, net 137 1,830 Total Revenues $ 66,577 $ 86,830 EXPENSES Advertising $ 13,975 $ 15,840 Interest expense 59,500 48,835 Compensation and benefits 18,545 12,798 General and administrative 7,109 4,639 Professional and consulting 3,657 4,438 Debt issuance 3 2,749 Securitization debt maintenance 1,432 1,496 Provision for losses 1,588 1,339 Direct subservicing costs 640 Depreciation and amortization 1, Installment obligations expense, net 515 2,320 Total Expenses $ 108,266 $ 95,445 Loss before income taxes (41,689) (8,615) Benefit for income taxes (6,639) (3,155) Net Loss $ (35,050) $ (5,460) Less net loss attributable to non-controlling interests (18,963) (4,115) Net loss attributable to $ (16,087) $ (1,345) Weighted average shares of Class A common stock outstanding: Three Months Ended March 31, Basic 15,574,746 14,271,842 Diluted 15,574,746 14,271,842 Net loss per share attributable to stockholders of Class A common stock of Basic $ (1.03) $ (0.09) Diluted $ (1.03) $ (0.09) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 2

9 Condensed Consolidated Statements of Comprehensive Loss (Unaudited) Three Months Ended March 31, Net loss $ (35,050) $ (5,460) Total comprehensive loss (35,050) (5,460) Less: comprehensive loss allocated to non-controlling interests (18,963) (4,115) Comprehensive loss attributable to $ (16,087) $ (1,345) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3

10 Condensed Consolidated Statement of Changes in Stockholders Equity (Unaudited) (Dollars in thousands) Accumulated Other Comprehensive Income Noncontrolling Interest Accumulated Deficit Additional Paid-In- Capital Common Stock- Treasury Stock Common Stock-Class A Class B Total Stockholders Shares Dollars Shares Dollars Shares Dollars Equity Balance as of December 31, 2015 $ $ 24,349 $ (70,765) $ 104, ,072 $(2,138) 15,534,372 $ 8,908,698 $ $ 56,159 Net loss (18,963) (16,087) (35,050) Share-based compensation Exchange of JGW LLC common interests into Class A common stock (321) ,669 (193,669) Balance as of March 31, 2016 $ $ 5,206 $ (86,852) $ 105, ,072 $(2,138) 15,728,041 $ 8,715,029 $ $ 21,416 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4

11 Condensed Consolidated Statements of Cash Flows (Unaudited) Three Months Ended March 31, Cash flows from operating activities: Net loss $ (35,050) $ (5,460) Adjustments to reconcile net loss to net cash used in operating activities: Provision for losses 1,588 1,339 Depreciation Changes in mortgage servicing rights, net (877) Amortization of finance receivables acquisition costs Amortization of intangibles Amortization of debt issuance costs 2,531 1,884 Proceeds from sale of and principal payments on mortgage loans held for sale 524,130 Originations and purchases of mortgage loans held for sale (574,662) Change in unrealized gains/losses on finance receivables (151,223) (36,376) Change in unrealized gains/losses on long-term debt 172,592 (7,700) Change in unrealized gains/losses on derivatives 5,774 4,380 Net proceeds from sale of finance receivables 91,335 Realized and unrealized gains on sale of mortgage loans held for sale, net of direct costs (16,656) Purchases of finance receivables (71,674) (106,993) Collections on finance receivables 133, ,476 Gain on sale of finance receivables (21,660) Recoveries of finance receivables 1 Accretion of interest income (52,936) (44,445) Accretion of interest expense (4,182) (11,986) Gain on extinguishment of debt (593) Share-based compensation expense Change in marketable securities (137) (1,830) Installment obligations expense, net 515 2,320 Deferred income taxes (6,639) (3,155) Decrease (increase) in operating assets: Restricted cash and investments 5,246 (6,052) Other assets 7, Other receivables (470) 2,092 (Decrease) increase in operating liabilities: Accrued expenses and accounts payable 1,354 5,353 Accrued interest 1, Other liabilities (620) 396 Net cash provided by (used in) operating activities $ 12,611 $ (75,708) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5

12 Condensed Consolidated Statements of Cash Flows (Unaudited) (Continued) Three Months Ended March 31, Cash flows from investing activities: Purchase of Home Lending., net of cash acquired $ (7,630) $ Purchases of premises and equipment, net of sales proceeds (260) (905) Net cash used in investing activities $ (7,890) $ (905) Cash flows from financing activities: Purchases of treasury stock $ $ (2,797) Issuance of VIE long-term debt 2, ,955 Payments on lease obligations 12 Repayments of long-term debt and derivatives (86,511) (84,710) Gross proceeds from revolving credit facility 614,665 89,468 Repayments of revolving credit facilities (566,019) (70,092) Issuance of installment obligations payable Purchase of marketable securities (763) (999) Repayments of installment obligations payable (6,858) (6,390) Proceeds from sale of marketable securities 6,858 6,390 Net cash (used in) provided by financing activities $ (35,578) $ 148,824 Net (decrease) increase in cash and cash equivalents (30,857) 72,211 Cash and cash equivalents at beginning of the period 57,322 41,648 Cash and cash equivalents at the end of the period $ 26,465 $ 113,859 Supplemental disclosure of cash flow information: Cash paid for interest $ 59,609 $ 58,322 Cash paid for income taxes $ 100 $ 28 Supplemental disclosure of noncash items: Retained mortgage servicing rights in connection with sale of mortgage loans $ 2,511 $ Mortgage loans subject to repurchase rights from Ginnie Mae $ 6,360 $ Exchange of LLC Common Interests for shares of Class A common stock $ 321 $ The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6

13 Notes to the Condensed Consolidated Financial Statements (Unaudited) 1. Background, Basis of Presentation and Significant Accounting Policies Organization and Description of Business Activities (the Corporation ) is a Delaware holding company that was incorporated on June 21, The Corporation operates through its managing membership in, LLC ( JGW LLC ), the Corporation's sole operating asset. JGW LLC is a controlled and consolidated subsidiary of the Corporation whose sole asset is its membership interest in J.G. Wentworth, LLC. The Company refers collectively to the Corporation and, unless otherwise stated, all of its subsidiaries. The Company, operating through its subsidiaries and affiliates, has its principal offices in Radnor, Pennsylvania and Woodbridge, Virginia. We are a diversified financial services company that specializes in providing solutions to consumers in need of cash. Our direct-to-consumer businesses use the internet, television, direct mailing and other channels to offer a variety of solutions including structured settlement payment purchasing, mortgage origination (both purchase and refinancing), prepaid cards and access to personal lending. We warehouse, securitize, sell or otherwise finance the financial assets that we purchase in transactions that are structured to ultimately generate cash proceeds to us that exceed the purchase price we paid for those assets. The Company has identified the following two reportable segments: (i) Structured Settlement Payments ( Structured Settlements ) - Structured Settlements provides liquidity to individuals with financial assets such as structured settlements, annuities and lottery winnings by either purchasing these financial assets for a lump-sum payment, issuing installment obligations payable over time, or serving as a broker to other purchasers of those financial assets. We engage in warehousing and subsequent resale or securitization of these various financial assets. Structured Settlements also includes prepaid card solutions and provision of access to personal lending and funding for pre-settled legal claims as well as our corporate activities. (ii) Home Lending - Home Lending is primarily engaged in retail lending, originating primarily Federal Housing Administration ( FHA ), U.S. Department of Veterans Affairs ( VA ) and conventional loans, and is approved as a Title II, non-supervised direct endorsement mortgagee with the U.S. Department of Housing and Urban Development ("HUD"). In addition, Home Lending is an approved issuer with the Government National Mortgage Association ( Ginnie Mae ), Federal Home Loan Mortgage Corporation ("Freddie Mac") and U.S. Department of Agriculture ( USDA ) as well as an approved seller and servicer with the Federal National Mortgage Association ( Fannie Mae ). Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ( U.S. GAAP ) for interim financial information and Article 10 of Regulation S-X and do not include all of the information required by U.S. GAAP for complete financial statements. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments which are necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods presented. All such adjustments are of a normal and recurring nature. The results of operations for interim periods are not necessarily indicative of the results for the entire year. The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and the amounts of revenues and expenses during the reporting periods. The most significant balance sheet accounts that could be affected by such estimates are variable interest entity ( VIE ) and other finance receivables, at fair value; mortgage loans held for sale, at fair value; mortgage servicing rights, at fair value; intangible assets and goodwill; VIE derivative liabilities, at fair value; and VIE long-term debt issued by securitization and permanent financing trusts, at fair value. Actual results could differ from those estimates and such differences could be material. These interim financial statements should be read in conjunction with the Company s 2015 audited consolidated financial statements that are included in its Annual Report on Form 10-K. The accompanying unaudited condensed consolidated financial statements include the accounts of the Corporation, its wholly-owned subsidiaries, including those entities that are considered VIEs, and where the Company has been determined to be the primary beneficiary in accordance with Accounting Standards Codification ( ASC ) 810, Consolidation ( ASC 810 ). Excluded from the unaudited condensed consolidated financial statements of the Company are those entities that are considered VIEs and where the Company has been deemed not to be the primary beneficiary according to ASC 810. JGW LLC meets the definition of a VIE under ASC 810. Further, the Corporation is the primary beneficiary of JGW LLC as a result of its control over JGW LLC. As the primary beneficiary of JGW LLC, the Corporation consolidates the financial results 7

14 Notes to the Condensed Consolidated Financial Statements (Unaudited) of JGW LLC and records a non-controlling interest for the economic interest in JGW LLC not owned by the Corporation. The Corporation s and the noncontrolling interests' economic interest in JGW LLC was 54.6% and 45.4%, respectively, as of March 31, The Corporation s and the non-controlling interests' economic interest in JGW LLC was 53.9% and 46.1%, respectively, as of December 31, Net loss attributable to the non-controlling interests in the unaudited condensed consolidated statements of operations represents the portion of loss attributable to the economic interest in JGW LLC held by entities other than the Corporation. The allocation of net loss to the non-controlling interests is based on the weighted average percentage of JGW LLC owned by the non-controlling interests during the reporting period. The non-controlling interests weighted average economic interests in JGW LLC for the three months ended March 31, 2016 and 2015 were 45.7% and 50.1%, respectively. The net loss attributable to in the unaudited consolidated statement of operations for the three months ended March 31, 2016 and 2015 does not necessarily reflect the Corporation s weighted average economic interests in JGW LLC for the respective periods because the majority of the benefit for income taxes was specifically attributable to the legal entity, and thus was not allocated to the non-controlling interests. For the three months ended March 31, 2016 and 2015, $(6.5) million and $(3.1) million of the $(6.6) million and $(3.2) million total tax benefit, respectively, was specifically attributable to. Refer to Note 16 for a description of the Company's income taxes. Non-controlling interests in the unaudited condensed consolidated balance sheets represent the portion of equity attributable to the non-controlling interests of JGW LLC. The allocation of equity to the non-controlling interests in JGW LLC is based on the percentage owned by the non-controlling interests in the entity. All material inter-company balances and transactions are eliminated in consolidation. Certain prior-period amounts have been reclassified to conform to current-period presentation. Significant Accounting Policies As of March 31, 2016 there have been no significant changes to the Company's accounting policies as previously disclosed in the Annual Report on Form 10-K for the year ended December 31, Recently Adopted Accounting Pronouncements There were no accounting pronouncements adopted during the three months ended March 31, Business Combinations In accordance with ASC 805, Business Combinations ( ASC 805 ), the Company accounts for acquisitions by applying the acquisition method of accounting, which requires among other things, that the assets acquired and liabilities assumed in a business combination be measured at their fair values as of the closing date of the acquisition. On July 31, 2015, the Company completed its acquisition of Home Lending. The results of Home Lending are included in the Company's unaudited condensed consolidated statement of operations from the date of acquisition and are reported as a separate reportable segment. Home Lending is primarily engaged in originating, selling and servicing residential mortgage loans. Its acquisition represented a major step in the Company's strategy to become a more diversified financial services company. The final acquisition fair value of the consideration paid was $74.6 million, which consisted of $53.2 million that was paid in cash and $13.0 million that was paid through the issuance of 1,572,327 shares of the Company's Class A common stock. The fair value of the 1,572,327 Class A common shares issued was calculated using the closing trading price of the Company s common shares as of the acquisition date. An additional $8.4 million of consideration was accrued to reflect the estimated outcome of certain post-close adjustments included in the stock purchase agreement, of which $7.6 million and $0.8 million was paid in the three months ended March 31, 2016 and December 31, 2015, respectively, and thereby concluded our measurement-period adjustments. The excess of the consideration paid over the fair value of net assets acquired was recorded as goodwill in the amount of $8.4 million which was assigned to the Home Lending reporting segment. We elected to treat the acquisition of the stock as an asset acquisition and consequently, the goodwill and the intangible assets are expected to be deductible for income tax purposes under section 197 of the Internal Revenue Service Code. Of the $23.8 million of acquired of intangible assets, $13.2 million was assigned to licenses and approvals that are not subject to amortization. The remaining $10.6 million of acquired intangible assets are subject to a weighted-average useful life of approximately 9.3 years. These finite-lived assets included affinity relationships of $9.5 million ( 10 -year useful life) and a trade name of $1.1 million ( 3 -year useful life). 8

15 Notes to the Condensed Consolidated Financial Statements (Unaudited) 4. Goodwill and Intangible Assets Goodwill by business segment includes the following as of: March 31, 2016 December 31, 2015 Structured Settlement Payments $ $ Home Lending 8,369 8,369 Total Goodwill $ 8,369 $ 8,369 Intangible assets subject to amortization include the following as of: March 31, 2016 Structured Settlement Payments Home Lending Cost Accumulated Amortization Cost Accumulated Amortization Database $ 4,609 $ (4,267) $ $ Customer relationships 18,844 (15,630) Domain names 486 (452) Trade name 1,095 (346) Affinity relationships 9,547 (635) Intangible assets subject to amortization $ 23,939 $ (20,349) $ 10,642 $ (981) December 31, 2015 Database $ 4,609 $ (4,250) $ $ Customer relationships 18,844 (15,375) Domain names 486 (450) Trade name 1,095 (228) Affinity relationships 9,547 (397) Intangible assets subject to amortization $ 23,939 $ (20,075) $ 10,642 $ (625) Amortization expense for the three months ended March 31, 2016 and 2015 was $0.6 million and $0.4 million, respectively. Amortization of intangible assets is included in depreciation and amortization in the Company's unaudited condensed consolidated statement of operations. 9

16 Notes to the Condensed Consolidated Financial Statements (Unaudited) Estimated future amortization expense for amortizable intangible assets for the nine months ending December 31, 2016 and for each of the succeeding five calendar years and thereafter is as follows: Estimated Future Amortization Expense Remainder of 2016 $ 1, , , , , Thereafter 3,420 Total future amortization expense $ 13,251 As of March 31, 2016 and December 31, 2015, the carrying value of the Company's indefinite-lived trade name, acquired in connection with the Company's 2011 acquisition of Orchard Acquisition Company ("OAC"), was $3.3 million. As of March 31, 2016 and December 31, 2015, the carrying value of Home Lending's indefinite-lived licenses and approvals intangible asset was $13.2 million. We evaluate our long-lived assets, including finite and indefinite-lived intangible assets for impairment on an annual basis, or more frequently if events or changes in circumstances indicate a potential impairment between annual measurement dates. Management qualitatively determines whether it is more likely than not (i.e., a likelihood of greater than 50%) that the fair value of the Company's reporting units and intangible assets are less than their carrying amounts prior to performing the two-step process to evaluate the potential impairment of goodwill and intangible assets with indefinite useful lives. In the first quarter of 2016, we performed a qualitative assessment based, in part, on the factors outlined below: Macroeconomic factors including the interest rate environment and the securitization and warehouse credit market; Industry specific factors including significant changes in competition and regulatory impediments; Cost related factors including an increase in labor and other operating costs; Overall financial performance, such as declining cash flows and revenues or earnings; and Other relevant entity-specific events such as changes in management, changes in stock price, and counterparty risks. In performing our qualitative assessment, we identified and considered all relevant events and circumstances, including the Company's reporting units' recent financial performance, projected operating results, and the Company s market capitalization. Based on the weight of evidence and the significance of the identified factors, we determined that it was not more likely than not that the fair value of the Company's goodwill, indefinite lived intangible assets and long-lived assets were less than their carrying values. 5. Fair Value Measurements Under ASC 820, Fair Value Measurements and Disclosures ( ASC 820 ), fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard focuses on the exit price in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. U.S. GAAP establishes a fair value reporting hierarchy to maximize the use of observable inputs when measuring fair value and defines the three levels of inputs as noted below: Level 1 inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that are accessible at the measurement date. Level 2 inputs to the valuation methodology include quoted prices in markets that are not active or quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 3 inputs to the valuation methodology are unobservable, reflecting the entity s own assumptions about assumptions market participants would use in pricing the asset or liability. 10

17 Notes to the Condensed Consolidated Financial Statements (Unaudited) A financial instrument s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Fair value is a market based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity specific measure. Therefore, even when market assumptions are not readily available, the Company s own assumptions are set to reflect those that market participants would use in pricing the assets or liabilities at the measurement date. The Company uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The Company also evaluates various factors to determine whether certain transactions are orderly and may make adjustments to transactions or quoted prices when the volume and level of activity for an asset or liability have decreased significantly. The above conditions could cause certain assets and liabilities to be reclassified from Level 1 to Level 2 or Level 3 or reclassified from Level 2 to Level 3. The inputs or methodology used for valuing the assets or liabilities are not necessarily an indication of the risk associated with the assets and liabilities. The following describes the methods used in estimating the fair values of certain financial statement items: For assets and liabilities measured at fair value in the unaudited condensed consolidated financial statements : Marketable securities The fair value of investments in marketable securities is based on quoted market prices. VIE and other finance receivables, at fair value, and VIE long-term debt issued by securitization and permanent financing trusts, at fair value The estimated fair value of VIE finance receivables, at fair value, other finance receivables, at fair value and VIE long-term debt issued by securitization and permanent financing trusts, at fair value, is determined based on a discounted cash flow model using expected future collections discounted at a calculated rate as described below. For guaranteed structured settlements and annuities, the Company allocates the projected cash flows based on the waterfall of the securitization and permanent financing trusts (collectivity the Trusts ). The waterfall includes fees to operate the Trusts (servicing fees, administrative fees, etc.), note holder principal and note holder interest. Many of the Trusts have various tranches of debt that have varying subordinations in the waterfall calculation. Refer to Note 14 for additional information. The remaining cash flows, net of those obligations, are considered a residual interest which is projected to be paid to the Company as the retained interest holder. The projected finance receivable cash flows used to pay the obligations of the Trusts are discounted using a calculated rate derived from the fair value interest rates of the debt in the Trusts. The fair value interest rate of the debt is derived using a swap curve and applying a calculated spread that is based on either: (i) market indices that are highly correlated with the spreads from the Company s previous securitizations and asset sales or (ii) the Company's most recent securitization or asset sale if it occurs within close proximity to the reporting date. The calculated spread is adjusted for the specific attributes of the debt in the Trusts, such as years to maturity and credit grade. The debt s fair value interest rates are applied to the projected future cash payments paid on the principal and interest to derive the debt s fair value. The debt s fair value interest rates are blended using the debt s principal balance to obtain a weighted average fair value interest rate which is used to determine the value of the finance receivables asset cash flows. In addition, the Company considers transformation costs and profit margin associated with its securitizations to derive the fair value of its finance receivables asset cash flows. The finance receivables residual cash flows remaining after the projected obligations of the Trusts are satisfied and are discounted using a separate yield based on an assumed rating of the residual tranche ( 9.19% and 8.30% as of March 31, 2016 and December 31, 2015, respectively, with a weighted average life of 20 years as of both dates). The residual cash flows are adjusted for a loss assumption of 0.25% over the life of the finance receivables in its fair value calculation. Finance receivable cash flows, including the residual asset cash flows, are included in VIE and other finance receivables, at fair value, in the Company s unaudited condensed consolidated balance sheets. The associated debt s projected future cash payments for principal and interest are included in VIE long-term debt issued by securitization and permanent financing trusts, at fair value. For finance receivables not yet securitized, the Company uses the calculated spreads based on market indices, while also considering transformation costs and profit margin to determine the fair value yield adjusting for expected losses and applying the residual yield for the cash flows the Company projects would make up the retained interest in a securitization. For the Company s Life Contingent Structured Settlements ( LCSS ) receivables and long-term debt issued by its related permanent financing trusts, the blended weighted average discount rate of the LCSS receivables at the time of borrowing (which occurs frequently throughout the year) is used to determine the fair value of the receivables cash flows. The residual cash flows relating to the LCSS receivables are discounted using a separate yield based on the assumed rating of the residual tranche reflecting the life contingent feature of these receivables. 11

18 Notes to the Condensed Consolidated Financial Statements (Unaudited) Mortgage loans held for sale, at fair value The fair value of mortgage loans held for sale is calculated using observable market information including pricing from actual market transactions, investor commitment prices, or broker quotations. Mortgage servicing rights, at fair value The Company uses a discounted cash flow approach to estimate the fair value of mortgage servicing rights ( MSRs ) incorporating assumptions management believes market participants would use in determining the fair value. The assumptions used in the estimation of the fair value of MSRs include the contractual service fees, ancillary income and late fees, the cost of servicing, the discount rate, the float rate, the inflation rate, prepayment speeds and default rates. Interest rate lock commitments, at fair value The Company estimates the fair value of interest rate lock commitments ( IRLCs ) based on the value of the underlying mortgage loan, quoted mortgage backed securities ( MBS ) prices and estimates of the fair value of the MSRs and the probability, commonly referred to as the "pull-through" rates, that the mortgage loan will close within the terms of the IRLCs. These pull-through rates are based on the Company s historical data and reflect the Company s best estimate of the likelihood that a commitment will ultimately result in a closed loan. The Company estimates fair value of forward sales commitments based on quoted prices. VIE derivative liabilities, at fair value The fair value of interest rate swaps is based on pricing models which consider current interest rates, and the amount and timing of cash flows. Forward sale commitments, at fair value The fair value of forward sale commitments is based on pricing models which consider current interest rates, and the amount and timing of cash flows. Assets and liabilities for which fair value is only disclosed in the notes to the unaudited condensed consolidated financial statements : VIE and other finance receivables, net of allowances for losses The fair value of structured settlement, annuity and lottery receivables is estimated based on the present value of future expected cash flows using discount rates commensurate with the risks involved. The fair value of pre-settlement funding transactions and attorney cost financing is based on expected losses and historical loss experience associated with the respective receivables using management s best estimate of the key assumptions regarding credit losses. Other receivables, net of allowances for losses The estimated fair value of advances receivable and certain other receivables, which are generally recovered in less than three months, is equal to the carrying amount. The carrying value of other receivables which have expected recoverability of greater than three months, consist primarily of a note receivable, are estimated based on the present value of future expected cash flows using management s best estimate of certain key assumptions, including discount rates commensurate with the risks involved. Term loan payable The estimated fair value of the term loan payable is based on recently executed transactions and market price quotations obtained from third-parties. VIE borrowings under revolving credit facilities and other similar borrowings The estimated fair value of borrowings under revolving credit facilities and other similar borrowings is based on the borrowing rates currently available to the Company for debt with similar terms and remaining maturities. Other borrowings under revolving credit facilities and other similar borrowings The estimated fair value of borrowings under revolving credit facilities and similar borrowings is based on the borrowing rates currently available to the Company for debt with similar terms and remaining maturities. VIE long-term debt The estimated fair value of VIE long-term debt is based on fair value borrowing rates available to the Company based on recently executed transactions with similar underlying collateral characteristics, reflecting the specific terms and conditions of the debt. Installment obligations payable Installment obligations payable are reported at contract value determined based on changes in the measuring indices selected by the obligees under the terms of the obligations over the length of the obligations. The fair value of installment obligations payable is estimated to be equal to carrying value. 12

19 Notes to the Condensed Consolidated Financial Statements (Unaudited) The following table sets forth the Company s assets and liabilities that are carried at fair value on the Company s unaudited condensed consolidated balance sheets as of: March 31, 2016: Assets Marketable Securities: Equity securities Quoted Prices in Active Markets for Identical Assets Level 1 Significant Other Observable Inputs Level 2 Significant Unobservable Inputs Level 3 Total at Fair Value US large cap $ 26,479 $ $ $ 26,479 US mid cap 4,824 4,824 US small cap 5,650 5,650 International 12,770 12,770 Other equity 3,846 3,846 Total equity securities 53,569 53,569 Fixed income securities US fixed income 17,334 17,334 International fixed income 1,441 1,441 Other fixed income Total fixed income securities 18,775 18,775 Other securities Cash & cash equivalents 4,146 4,146 Alternative investments Annuities 2,287 2,287 Total other securities 7,070 7,070 Total marketable securities 79,414 79,414 VIE and other finance receivables at fair value 4,463,074 4,463,074 Mortgage loans held for sale, at fair value 187, ,146 Mortgage servicing rights, at fair value 30,164 30,164 Interest rate lock commitments, at fair value (1) 10,539 10,539 Total Assets $ 79,414 $ 187,146 $ 4,503,777 $ 4,770,337 Liabilities VIE derivative liabilities, at fair value $ $ 72,363 $ $ 72,363 VIE long-term debt issued by securitization and permanent financing trusts, at fair value 4,016,993 4,016,993 Forward sale commitments, at fair value (2) 2,468 2,468 Total Liabilities $ $ 74,831 $ 4,016,993 $ 4,091,824 (1) Included in other assets on the Company s unaudited condensed consolidated balance sheet. (2) Included in other liabilities on the Company s unaudited condensed consolidated balance sheet. 13

20 Notes to the Condensed Consolidated Financial Statements (Unaudited) December 31, 2015 Assets Marketable Securities: Equity securities Quoted Prices in Active Markets for Identical Assets Level 1 Significant Other Observable Inputs Level 2 Significant Unobservable Inputs Level 3 Total at Fair Value US large cap $ 28,670 $ $ $ 28,670 US mid cap 5,213 5,213 US small cap 5,477 5,477 International 14,068 14,068 Other equity 3,308 3,308 Total equity securities 56,736 56,736 Fixed income securities: US fixed income 16,945 16,945 International fixed income 1,217 1,217 Other fixed income Total fixed income securities 18,162 18,162 Other securities: Cash & cash equivalents 7,634 7,634 Alternative investments Annuities 2,301 2,301 Total other securities 10,096 10,096 Total marketable securities 84,994 84,994 VIE and other finance receivables, at fair value 4,386,147 4,386,147 Mortgage loans held for sale, at fair value 124, ,508 Mortgage servicing rights, at fair value 29,287 29,287 Interest rate lock commitments, at fair value (1) 4,934 4,934 Total Assets $ 84,994 $ 124,508 $ 4,420,368 $ 4,629,870 Liabilities VIE derivative liabilities, at fair value $ $ 66,519 $ $ 66,519 VIE long-term debt issued by securitization and permanent financing trusts, at fair value 3,928,818 3,928,818 Forward sale commitments, at fair value (2) Total Liabilities $ $ 66,666 $ 3,928,818 $ 3,995,484 (1) Included in other assets on the Company s unaudited condensed consolidated balance sheet. (2) Included in other liabilities on the Company s unaudited condensed consolidated balance sheet. 14

21 Notes to the Condensed Consolidated Financial Statements (Unaudited) The following table sets forth the Company s quantitative information about its Level 3 fair value measurements as of: March 31, 2016 Assets VIE and other finance receivables, at fair value Fair Value Valuation Technique Significant Unobservable Input Range (Weighted Average) $ 4,463,074 Discounted cash flow Discount rate 2.63% % (3.90%) Mortgage servicing rights, at fair value 30,164 Discounted cash flow Discount rate 9.50% % (10.25%) Interest rate lock commitments, at fair value Total Assets $ 4,503,777 Prepayment speed 8.85% % (10.28%) Cost of servicing $65 - $90 ($74) 10,539 Internal model Pull-through rate 32.99% % (70.79%) Liabilities VIE long-term debt issued by securitization and permanent financing trusts, at fair value Total Liabilities $ 4,016,993 4,016,993 Discounted cash flow Discount rate 1.24% % (3.46%) December 31, 2015 Assets VIE and other finance receivables, at fair value $ 4,386,147 Discounted cash flow Discount rate 3.33% % (4.47%) Mortgage servicing rights, at fair value 29,287 Discounted cash flow Discount rate 9.54% % (10.27%) Interest rate lock commitments, at fair value Total Assets $ 4,420,368 Prepayment speed 8.24% % (9.06%) Cost of servicing $65 - $90 ($75) 4,934 Internal model Pull-through rate 37.44% % (74.91%) Liabilities VIE long-term debt issued by securitization and permanent financing trusts, at fair value Total Liabilities $ 3,928,818 3,928,818 Discounted cash flow Discount rate 1.69% % (4.13%) A significant unobservable input used in the fair value measurement of most of the Company s assets and liabilities measured at fair value using unobservable inputs (Level 3) is the discount rate. Significant increases (decreases) in the discount rate used to estimate fair value in isolation would result in a significantly lower (higher) fair value measurement of the corresponding asset or liability. An additional significant unobservable input used in the fair value measurement of the mortgage servicing rights, at fair value, is prepayment speed. Significant increases (decreases) in the prepayment speed used to estimate the fair value of mortgage servicing rights in isolation would result in a significantly lower (higher) fair value measurement. Significant increases (decreases) in the cost of servicing used to estimate the fair value of mortgage servicing rights in isolation would result in a significantly lower (higher) fair value measurement. Significant increases (decreases) in the pull-through rate used to estimate the fair value of IRLCs in isolation would result in a significantly higher (lower) fair value measurement. 15